Economics basic understanding #3 Flashcards
Information fromOnline textbook
What are the guiding forces in a free-market economy?(Explain each)
- Prices play the key role in this sort of system, providing signals and incentives to producers and consumers. (Consumers express changes in their preferences by their decisions to buy (or not to buy) at the going price. This is then a signal to firms, which are able to respond to changes in consumer demand,given the incentive of profitability, which is related to price.)
- consumers try to maximise the satisfaction they gain from consuming a range of products
- firms try try to maximise their profits by responding to consumer demand through the medium of price signals.
Give two examples of countries using micromanagement on their economies today
North Korea and Cuba
Give three way the government intervenes in mixed market systems
1)providing market infrastructure
2) by influencing the allocation of resources through imposing taxes
3)undertaking expenditure and through
regulation
What does market-friendly state intervention mean?
in other words, when governments intervene in the economy, they should do so in a way that helps markets to work, rather than trying to have the government replace market forces
What does market-friendly state intervention mean?
in other words, when governments intervene in the economy, they should do so in a way that helps markets to work, rather than trying to have the government replace market forces
Describe difficulties faced by transition economies ( 4 key points)
- both firms and consumers need to become accustomed to the idea that they have increased freedom to make decisions
- that prices need to adjust and take a more active role in providing signals and incentives.
- People and firms need to get used to the idea that they need to take risk, rather than depending on the state to take decisions for them.
- The role of entrepreneurs in these transition economies was especially important. They were the ones who needed to recognise opportunities and be willing to take on risk.
State problem society faces in resource allocation and the various way the problem is being tackled
Society faces a coordination problem in seeking to find a good pattern of resource allocation. The coordination problem is tackled in different ways in market, on a spectrum between centrally planned, mixed economies and free-market economies.
Outline what the following situations mean:
- At any point on the PPC
-At any point inside the PPC
-Points beyond the PPC
- society is making full use
of all resources.
-there is unemployment
of some resources. - are unattainable
Outline what happens to PPC when:
- the productive capacity of the economy increases
- there is a reduction in the resources available
- the production possibility curve moves outwards
- the PPC will shift inwards
Describe the three features that define a private good (Include one word to summarize each feature)
Excludability: other people can be excluded from consuming it.
Rivalrous: once consumed by a person, it cannot be consumed again.
Rejectable: if an individual can choose to not consume the good
What are characteristic of a public good
excludability, non-rivalry and non-rejectability
Give three examples of public goods
A streetlight, a lighthouse, pubic parks
Describe what is a semi-public good (include a example)
When a good does not have all the characteristic of a public good or a private good.
(An example is congested roads)
What is the underpinning idea of a merit good, about who should make the decisions?
the government has better information about the good than consumers, so needs to take decisions on their behalf.
Give two examples of demerit goods
hard drugs and tobacco.
